Microeconomics: Demand and Supply Concepts

Law of Demand

• Price rises -> Quantity demanded decreases (ceteris paribus).

Absolute and Relative Prices

• Absolute prices: Measured in currency units.

• Relative prices: Units of good Y sacrificed to acquire good X; only relative prices affect consumer choices.

Effects on Demand

• Substitution effect: Change in quantity demanded due to price change of one good relative to others.

• Income effect: Change in quantity demanded due to change in consumer purchasing power.

Demand Schedule and Curve

• Demand schedule: Quantity demanded at various prices.

• Demand curve: Graphical representation, downward sloping.

Determinants of Demand

• Factors influencing demand shift: normal goods (higher income increases demand), inferior goods (higher income decreases demand).

Law of Supply

• Price rises -> Quantity supplied increases (ceteris paribus).

Supply Schedule and Curve

• Supply schedule: Quantity supplied at various prices.

• Supply curve: Graphical representation, upward sloping.

Market Equilibrium

• Occurs where quantity supplied equals quantity demanded.

• Disequilibrium: Any price where quantity demanded ≠ quantity supplied.

Surplus and Shortage

• Surplus: Quantity supplied > Quantity demanded, price falls to eliminate.

• Shortage: Quantity demanded > Quantity supplied, price rises to eliminate.

Total Welfare

• Total welfare = Consumer surplus + Producer surplus.

• Consumer surplus: Willingness to pay vs. actual price.

• Producer surplus: Price received vs. marginal cost of production.